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Part 1: Joint Product Costing

• 1.  Part 1: Joint Product Costing

Posted 26 days ago
Hi all,

Can someone please explain to me the following example?

Kode Co. manufactures a major product that gives rise to a by-product called May. May's only separable cost is a \$1 selling cost when a unit is sold for \$4. Kode accounts for May's sales by deducting the \$3 net amount from the cost of goods sold of the major product. There are no inventories. If Kode were to change its method of accounting for May from a by-product to a joint product, what would be the effect on Kode's overall gross margin?

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Odno Galdan
United States
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• 2.  RE: Part 1: Joint Product Costing

Posted 25 days ago
Hello Odno,

Gross margin will increase by \$ 1
Consider the followings: Sales = \$20 , COGS = \$10 , Sell & Admin exp. = \$ 2
By-Product method:             Gross profit = \$20 - (\$10 - \$3) = \$13     and  Net profit = \$13 - \$2 = \$11
Joint product method:          Gross profit = (\$20 + \$4) - \$10 = \$14   and  Net profit = \$14 - \$2 - \$1 = \$11

As described, the joint product method will treat May's as normal production item by adding its sales to revenue and deducting its costs as direct & indirect
in our case here the only cost for May is \$1 selling exp. (Indirect) which should be deducted after Gross Profit line item.

Kind regards

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Kuwait
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• 3.  RE: Part 1: Joint Product Costing

Posted 23 days ago
Hello Samer,

Thank you so much for the detailed explanation and its very helpful. I appreciate that. From your example, just a quick question that when we use the joint product method, is the main product not treated as COGS?

Thanks again!

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Odno Galdan
United States
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• 4.  RE: Part 1: Joint Product Costing

Posted 25 days ago
The total gross margin would be the same.

Revenue less cost of sales =Gross margin

There would be no effect in total gross margin as long as the total revenue and total cost are the same. It is only a matter of presentation and allocation  of joint  cost.

• 5.  RE: Part 1: Joint Product Costing

Posted 25 days ago
Hello Marlon,

How total cost is the same and it is only a matter of presentation ??? You have to define what direct / variable cost is and what is total.
The question itself has the answer because the accounting for Joint product is different from By-product (case of immaterial value of by-product)
What matters here is the by-product's selling cost (\$1) which should be considered as indirect, case of accounting for May as normal joint product at split off point.

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